Full Potential Oil Refi ning in a Challenging Environment
Refi ners have enjoyed comparatively good times as the rest of the oil industry suffered, but they should prepare for a more competitive season ahead.
Pedro Caruso, Diego Garcia and José de Sá
Pedro Caruso is a partner with Bain & Company in Houston, Diego Garcia is
a principal with Bain in Buenos Aires and José de Sá is a Bain partner in São
Paulo. All three work with Bain’s Global Oil & Gas practice.
Copyright © 2016 Bain & Company, Inc. All rights reserved.
Full Potential Oil Refi ning in a Challenging Environment
1
While much of the upstream sector has struggled
mightily since crude oil prices began collapsing in
the summer of 2014, refiners have enjoyed a period
of relative prosperity. Falling crude prices buoyed re-
fi ners’ margins, even as upstream producers trimmed
costs and strained the capacities of their suppliers.
But the easy times for refi ners may be fading rapidly.
Margins have already tightened as crude oil prices
stabilized and refiners began to pass their savings
on to customers (see Figure 1). That’s not all—
over the next few years, refiners will have to cope
with several long-term challenges sure to separate
leaders from laggards and possibly force some poor
performers from the field.
For starters, the global supply of crude continues to
get heavier and more sour, except in the US, where
light tight oil production has increased (see Figure 2).
Unstable supplies from North Africa and the Middle
East, together with fading production from the
North Sea, are also affecting this mix.
Over the next few years, refi ners will have to cope with several long-term challenges sure to separate leaders from laggards and possibly force some poor performers from the fi eld.
Figure 1: Overcapacity and price adjustments are pushing margins down
0
0.5
1.0
1.5
Q1 2015 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16E Q4 16E
Actual and projected refining margins in different regions(indexed to Q1 2015=1)
US Midwest (West Texas Intermediate) US West Coast (Alaska North Slope) Asia (Singapore)Credit Suisse North West Europe Indicator US Gulf Coast (Light Louisiana Sweet) US Gulf Coast (West Texas Intermediate)
Source: Credit Suisse Weekly Refining Margin Pack, March 2016
Projected
2
Full Potential Oil Refi ning in a Challenging Environment
industry, making life harder for refiners that operate
in regions with high labor and energy costs, or have weak
operating and capital project-execution capabilities.
Third, refi ners can expect more stringent regulation
in fuel specifi cations, refi nery emissions and biofuels—
and in most cases, new regulations will require addi-
tional investment and operating costs. Although developed
economies are leading this agenda, developing econ-
omies are rushing to catch up with these strict guide-
lines. Mexico, for example, is adopting rules that will
require heavy-duty vehicles there to comply with
emission standards as strict as those in the European
Union, and Saudi Aramco is working to reduce car-
bon emissions and tail gas fl aring.
These changes are creating more volatility in pric-
ing, forcing refiners to adjust their feedstocks more
frequently and dramatically than in the past, and
making long-range planning more difficult than
ever. The influx of heavier and more sour oils also
puts pressure on less complex refineries that must
consider investing in conversion units if they want
to stay in the game.
Second, new refineries are coming online that could
boost capacity beyond demand for refined products
(see Figures 3 and 4). Most of these large and
complex refineries are closer to the most dynamic
centers of demand in the Asia-Pacific region. Their
preferential access to markets, crude stocks and afford-
able labor supplies will bring structural shifts in the
Figure 2: The quality of crude has declined since 2000
Oil production is getting heavier ... ... and sulfur content is growing
0
20
40
60
Crude oil production by sulfur content (mbpd)Total growth in medium and heavy crude oil production (mbpd, 2000–14)
2000
US
Restof
world
25
2014
28
2000
22
2014
24
2000
38
2014
44
−2
0
2
4
6
−2 0 2 4
US
EU
MiddleEast
CIS
LatAmAfrica
APACCanada
Total growth in light crude oil production (mbpd, 2000–14) Sweet Medium sour Sour
15 mbpd, 2014 production
Getting heavier
Getting lighter
Note: mbpd=million barrels per daySources: ENI World Oil and Gas Review 2015; Bain analysis
Full Potential Oil Refi ning in a Challenging Environment
3
Figure 3: With increases in capacity, global supply of refi ned products will exceed demand
0
80
90
100
110
120
2015 16 17 18 19 20 21 22 23 24 25
Global demand and production capacity for oil products (mbpd)
Supply scenariosDemand
Refinedproducts
Biofuel, direct use of crude oiland other non-refined products
Minimum case: oversupplyaccelerates shutdowns
Base case: balanced shutdowns
Maximum case: verylimited shutdowns
Sources: OPEC 2015 World Oil Outlook; Enerdata, December 2014; Bain analysis
Figure 4: Refi neries around the world plan to increase their capacities for desulfurization and produc-ing higher-octane grades
1.0
MiddleEast
0.5
CIS
0.4
LatinAmerica
0.3
Africa
0.3
NorthAmerica
0.2
Europe
0.2
0.0
0.5
1.0
Average NCI
Asia-Pacific
11.7 9.08.9 6.6 5.8 7.6 5.8
0.0
1.0
2.0
MiddleEast
2.0
Asia-Pacific
1.4
LatinAmerica
0.8
Africa
0.7
CIS
0.5
NorthAmerica
0.2
Europe
Conversion Desulfurization and quality
0.1
Projected desulfurization and octane addition capacity, 2015–20 (mbpd)Projected additions to conversion capacity, 2015–20 (mbpd)
Notes: NCI=Nelson Complexity Index, averages for 2014; mbpd=million barrels per day Sources: OPEC 2015 World Oil Outlook; ENI World Oil and Gas Review 2015; Bain analysis
Desulfurization Higher octane
4
Full Potential Oil Refi ning in a Challenging Environment
• Markets. Consumption of refinery products is
shifting from developed to developing markets,
especially to China and other developing coun-
tries in the Asia-Pacific region, favoring the in-
dependent refiners there as well as the NOCs in
the Middle East and CIS independents, which
have competitive access to this market.
• Operating conditions. Middle Eastern NOCs
and CIS refiners have favored access to feed-
stock, lower energy costs and efficient capital
spending, which all can give them an edge in
operating conditions. European independents
and Latin American NOCs are the most chal-
lenged. Africa, given its low labor costs and sur-
plus of crude, seems a good candidate for refin-
Evaluating players and positions
These global trends affect the entire sector, with
some segments and refiners impacted more than
others. When we look at the key competitiveness
factors for refiners—markets, operating conditions
and quality of asset portfolio—we see that some are
better positioned than others to thrive over the next
decade. Middle Eastern national oil companies
(NOCs), globally integrated oil companies, indepen-
dent refiners in the Asia-Pacific region, and refiners
in the Commonwealth of Independent States (CIS)
are well positioned, while national oil companies in
Africa and Latin America and European indepen-
dents are under greater pressure (see Figure 5).
Figure 5: Middle East and CIS national oil companies are the most advantaged, EU independents and Latin American NOCs are challenged, and African refi neries are failing to capitalize on opportunity
Africa NOC 103
CIS NOC*** 103
Latin America NOC 97
Middle East NOC 99
APAC NOC 101
APAC independent 103
EU independent 102
US independent 96
Global integrated
Average crude slate adjustedby yield plus logistics (indexed)
Capital spending to expandcapacity adjusted by cost of capital (Thousands of US dollars per barrel of oil)*
Industrial electrical energy price (indexed)**
Average yearly salary in theoil and gas industry (indexed)
100
45
28
58
34
43
23
27
22
N/A
64
32
65
21
74
98
127
71
100
73
82
101
86
46
90
96
130
100
Feedstock Capex Energy costs Labor costs
Notes: *Adjusted by cost of capital in the region to oil and gas firms; **electrical energy as a proxy for refining energy prices; ***Includes CIS independents Sources: Hays; Oil & Gas Journal; EIA; IJGlobal; WACC expert; OPEC; ENI; Bain analysis
Best performers Worst performers Market vs. upstream break-even price difference Average performers
Full Potential Oil Refi ning in a Challenging Environment
5
its surplus, and Europe, Latin America, Africa and
the Asia-Pacific region remaining net importers.
In addition, they will create interesting and chal-
lenging supply-and-demand dynamics in local mar-
kets. For example, demand for fuel could decline on
the US West Coast, given the rising popularity of
hybrid and electric vehicles. If this occurs, the re-
gion would produce more gasoline than it needs,
and refiners would have to reduce capacity or export
more refined products to Asia.
Also, gasoline exports from Europe will face increas-
ing challenges from new export-oriented players,
including the US. NOC refiners in Latin America
and Africa are likely to feel the pressure from public
opinion as they continue to be net exporters of oil
and net importers of derivatives.
ery operations, but refiners there have not
capitalized on these advantages due to a lack of
engineering and construction capabilities.
• Asset portfolio. Globally integrated companies
and independents in the US and the Asia-Pacific
region are best positioned in terms of the scale
and complexity of their portfolios. Next in line
are the NOCs in the Asia-Pacific region, the
Middle East and the CIS, which are investing to
make their portfolios more competitive. The
portfolios of African NOCs, on the other hand,
are clearly at risk.
These changes will combine to shift the flows of re-
fined products around the world (see Figure 6),
with the Middle East and the CIS becoming the ma-
jor suppliers to the world, North America increasing
Figure 6: The Middle East and CIS are likely to strengthen their positions as net exporters, while Europe, Latin America, Asia-Pacifi c countries and Africa will import more
Regional balances in 2013 and 2019Thousands of barrels per day
Notes: Positive numbers indicate net export potential, negative numbers net import requirements; 2013 net exports to do not equal imports due to feedstock trade and product classification differences Sources: US Energy Information Administration; OPEC 2015 World Oil Outlook; Enerdata; Bain analysis
Stable, riding the light tight oil boom to remain a net exporter to Latin America and Europe
Continued need for diesel imports and competitionfor gasoline exports force M&A and closures
Integrating downstream, deploying the advantagefrom local oil to supply Europe and Asia-Pacific
Investing to supply diesel to Europe and Asia-Pacific, but upgrading outdated capacity is a challenge
Attempting to reduce imports with massive capacity additions, but not enough to offset demand growth
Efforts to increase local capacity and revert import status facing major financial and technical challenges
Historic importer, trying to expand into refining butfacing financial, operational and commercial challenges
−205
145
984
DieselGasoline
OECD Americas
995
1
1
−471−526 −559−548
DieselGasoline
Latin America6
2
3
4
5
6
7
−143−332
−657−998
DieselGasoline
Africa7
7021023
358762
DieselGasoline
Middle East3
−974−1490
1280
469
DieselGasoline
Asia-Pacific5
469 528897 835
DieselGasoline
CIS4718 652
−1057−1592
DieselGasoline
Europe2
6
Full Potential Oil Refi ning in a Challenging Environment
must understand their competitive differential
in each potential market, as well as key competi-
tive threats and how to achieve a logistical edge
over them.
• Optimize access to advantaged feedstock and
product yield. Now more than ever, refiners
must sharpen their linear program models to
reflect changing availability, quality and price
deltas of different crude oils. This has been par-
ticularly valuable in recent years in the US,
where refiners that quickly tapped into light tight oil
reaped great benefi ts.
• Achieve operational excellence. Focusing on
plant reliability, energy effi ciency, frontline labor
productivity, SG&A optimization and working-
Clearly, the world will become more complex for even
the most competitive refi ners, requiring them to em-
brace an agenda of strategic and operational effi cien-
cy, with the elements differing from one player to the
next, depending on the situation of each.
Toward full potential
As the conditions for the refining industry become
more challenging, even the most favored companies
have to work hard in five critical areas to achieve and
maintain their full potential. The Bain Refining Full
Potential Playbook offers a structured plan that can
help refiners remain competitive (see Figure 7).
• Protect and expand access to markets. Whether
focused on a local market or exports, refiners
Figure 7: The Refi ning Full Potential Playbook helps refi ners tackle competitiveness in a structured way
• Local and regional market full potential (channels, footprint, mix, pricing)• Export market strategy• Commercial excellence• Specialty strategy (e.g., lube, chemicals)
• Operating model • Organization effectiveness • Talent management
• Regulatory risk-assessment and adaptation plan • Regulatory compliance strategy
• Results Delivery®
• Commercial digitalization (digital B2B sales and marketing, pricing models)
• Digital operations and maintenance (predictive maintenance, operations intelligence, digital workers, remote operations)
• Digital supply chain (supply and demand market analytics, digital processes)
• Digital organization and capabilities (agile, digital innovation)
• Feedstock sourcing strategy• Crude slate to product slate optimization• Feedstock supply chain capabilities• S&OP excellence
• Maintenance and plant reliability• Energy efficiency• Frontline labor productivity• SG&A optimization• Working-capital management
• Capital projects- management process and system• Vendor management• Project and turnaround planning
• Refinery configuration assessment and reconversion plan• Portfolio assessment and optimization• Refinery closure plans• Joint ventures and adjacencies
Source: Bain analysis
Operations
Organization
Regulatory and stakeholders
Digitalization
Markets
Market access strategyFeedstock strategy
and yield managementOperational excellence Capital projects excellence Portfolio optimization
Assets
Full Potential Oil Refi ning in a Challenging Environment
7
Clearly, the world will become more complex for even the most competitive refi ners, requiring them to embrace an agenda of strategic and operational effi ciency, with the elements differing from one player to the next, depend-ing on the situation of each.
• First and foremost, they get the organization
right, with a robust operating model and organi-
zational construct that reduces costs and raises
effectiveness. (For more, read the Bain Brief “De-
sign Principles for a Robust Operating Model.”)
• Second, they grasp the external agenda, develop-
ing an essential understanding of how to manage
regulators and stakeholders, including govern-
ment agencies, owners, communities, vendors
and customers. Failing to properly engage with
any of these stakeholder groups may result in
asymmetric regulation, operational challenges
and loss of commercial opportunities.
• Third, they prepare for the future, capturing the
promise of digitalization—from delighting cus-
tomers with transparency and novel interfaces,
to improving reliability and the supply chain
with predictive analytics, to making internal
processes more efficient. Refiners have been
pioneers in the use of data and analytics, and
digitalization can take these capabilities to the
next level.
capital management are key to achieving excel-
lence. Many refiners have focused on this task
in recent years, but a large gap remains between
the most- and least-efficient players. Leading
performers use a system (see the Bain Brief
“What ‘Good’ Looks Like: Creating an Opera-
tional Excellence Management System”) that
clearly describes what excellence looks like, how
to achieve it and how to continuously improve
on it.
• Improve ability to manage capital projects. As
with operational excellence, achieving excellence
in capital projects requires refi ners to implement
and relentlessly improve robust project- and vendor-
management systems. Understanding the driv-
ers of cost, and working systematically to reduce
them, are especially important in regions that
have not been able to perform well in this dimen-
sion, such as Latin America or Africa.
• Optimize the refinery portfolio. Refiners
should pursue full potential for each refinery
and for their entire system without compro-
mising safety, yield, reliability or environmen-
tal compliance. They must evaluate scenarios
for the future and decide which signposts to
monitor to determine the most likely scenarios.
(For more, read the Bain Brief “Beyond Fore-
casting: Find Your Future in an Uncertain En-
ergy Market.”)
Finally, leading performers tend to focus on three
capabilities that put them in the best position to
tackle a full potential agenda.
8
Full Potential Oil Refi ning in a Challenging Environment
The refi ning sector is poised for a cycle of “natural
selection” that will separate the fi ttest from the rest,
based on how well they used the profi ts from this
most recent cycle to prepare for the storm on the ho-
rizon. The agenda is quite complex, even for the most
prepared players. But if tackled in a structured man-
ner with a focus on the highest value opportunities,
the odds for success increase dramatically. Time to
think ahead wisely and execute impeccably.
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Key contacts in Bain’s Global Oil & Gas practice
Americas Riccardo Bertocco in Dallas ([email protected]) Pedro Caruso in Houston ([email protected]) Diego Garcia in Buenos Aires ([email protected]) Ricardo Gold in São Paulo ([email protected]) Eduardo Hütt in Mexico City ([email protected]) Jorge Leis in Houston ([email protected]) Rodrigo Más in São Paulo ([email protected]) John McCreery in Houston ([email protected]) José de Sá in São Paulo ([email protected])
Asia-Pacifi c Sharad Apte in Bangkok ([email protected]) Francesco Cigala in Kuala Lumpur ([email protected]) Dale Hardcastle in Singapore ([email protected]) Brian Murphy in Perth ([email protected]) Europe, Joachim Breidenthal in Johannesburg ([email protected])Middle East Christophe de Mahieu in Dubai ([email protected])and Africa Torsten Lichtenau in London ([email protected]) Roberto Nava in Milan ([email protected]) Peter Parry in London ([email protected]) Mark Porter in London ([email protected]) Tiziano Rivolta in Milan ([email protected]) Natan Shklyar in Moscow ([email protected]) Luis Uriza in London ([email protected])